Recently, the Treasury and IRS issued new rules to make it easier for employees to access their 401(k) funds in cases of financial hardship.
The positive: The new rules could encourage participants to increase their contributions knowing that it will be easier to access their savings if a qualified hardship should arise.
The negative: The new rules could reduce the accumulation of savings for when participants actually do retire.
Costs such as Medical, educational, or costs associated with purchase of a primary residence are some examples of a financial hardships which could permit an individual to take an early withdrawal from his/her retirement account.
It is always recommended to look at all your options and consult with a financial advisor before taking any withdrawals from your 401(k).
What do the new rules mean for Employees?
Previously, participants were restricted from making any contributions for six months after a withdrawal. However, the six-month restriction was removed after a new rule was issued in November 2018. Employees can now contribute to their retirement account immediately after taking a hardship withdrawal.
The Treasury and IRS also issued another new rule at the end of last month allowing employees to access a greater portion of their 401k funds. Employer matching contributions, employer non-elective contributions and investment earnings are now accessible for participants to withdraw from in addition to their own contributions to the plan.
Beginning January 2020 this new rule will allow plan sponsors to no longer be required to force participants to take a plan loan first before requesting hardship distributions.
These new rules give participants easier accessibility to their money if they absolutely need it.
What do the new rules mean for Employers?
Sponsors of 401(k) plans need to consider the impact that the ease of hardship distributions may have on plan assets. The larger a plan’s assets the greater a negotiating tool it may be for the reduction of the plan’s expenses. It is ultimately up to the plan sponsors to voluntarily change these elements of plan design depending on the goals for the retirement plan.
Overall, the new rules are designed to encourage participants to increase their contributions to the company’s retirement plan. Employees will be comfortable contributing more knowing that they can easily access their money should qualified hardships arise.